Is it time to revisit Chinese real estate?

Over the last few months media coverage of the Chinese real estate market has been negative to say the least with some investors concerned about manipulation by the authorities. We have seen many property companies struggling to cover their financial liabilities and there has been something of a shakeup in the property investment market. However, recent economic data suggests that the Chinese economy is still growing and we may be seeing the start of a major shift in economic activity.

As a consequence, is it time to reconsider Chinese real estate as a long-term investment opportunity?

Economic growth

The second quarter of 2016 has seen a 6.7% increase in Chinese gross domestic product. While this figure is down on the headline making growth of recent years the fact it is at more “reasonable” levels may actually give investors more confidence. The spread of economic growth across the various sectors varies enormously with the likes of real estate increasing by 8.8% compared to 12 months earlier, construction by 7.3% with the likes of health and education increasing by 9%.

It is the increase in real estate output which has caught the eye of many investors who may recently have removed China from their list of preferred investment markets. So, how is the economy changing and is this sustainable in the longer term?

Transformation towards a services led economy

If you look at successful economies around the world you will see that while many have a limited manufacturing base it is the services sector which provides the long-term growth. China, like many countries in the Far East, has benefited over the last 20 years or so from competitive manufacturing costs but we have seen a long-term erosion of these competitive margins. As a consequence, growth in the services industry could create a very different outlook for the Chinese real estate market in the longer term.

The services industry on the whole grew by 7.5% in the second quarter of 2016 compared to 12 months earlier. This is a markedly improved performance especially when you bear in mind that manufacturing increased by 6.3% and agriculture by just 3.1%. It does look as though the Chinese authorities, Chinese businesses and investors are significantly more proactive in the services industry.

Chinese property market

It was also interesting to see that the number of property sales in the first half of 2016 increased by 42.1% compared to the same period in 2015. While this was a reduction from the 54.1% improvement in the first quarter it is worth noting that a tightening of property regulations by the government has impacted more recent property sales numbers. However, relatively cheap credit has prompted growing interest in the Chinese property market and this is likely to continue for the foreseeable future.

If the authorities continue their support for an expanded services sector this will benefit the long-term performance of the economy and ultimately create significantly greater demand for Chinese property going forward. We only need to look at successful Western economies to see the impact that buoyant a services sector can have on investor sentiment and in particular property investment.